Investors on the Hunt for ‘The Next Seattle’ as City Jumps to #3 Metro for Real Estate Investment in the Americas, CBRE Survey Finds

Seattle, WA – March 6, 2018 – Seattle is now tied with New York as the third most attractive market for investment properties, behind Dallas/Ft. Worth and Los Angeles/Southern California, according to the CBRE Americas Investor Intentions Survey 2018. A prolonged period of U.S. economic growth, as well as tax cuts and favorable regulatory changes, means that commercial real estate investors are more positive going into 2018 than they were at the start of last year.

The 2018 survey results reveal that the largest share (45 percent) of investors plan to increase their level of acquisitions in the Americas compared with last year. This pick-up in investor appetite marks a reversal from the downward or flat trend recorded in the prior two surveys. In total, 88 percent of investors plan to either maintain or increase spending in 2018—up from 83 percent in 2017. Just 12 percent of investors plan to reduce their purchases in 2018, lower than the 17 percent in 2017.

Investors see a “global economic shock” that undermines occupier demand (30 percent) as the greatest potential threat in 2018, slightly more than last year (22 percent). In contrast, investors are less worried about interest rates rising more quickly than expected this year (16 percent in 2018 vs. 21 percent in 2017).

“Despite the possibility of escalating interest rates, the vast majority of investors intend to acquire assets in the Americas in 2018. Risk tolerance is expected to remain unchanged, but investors’ search for yield and asset diversification is pushing them toward value-add assets, secondary markets and ‘alternatives’ in 2018,” said Brian McAuliffe, President, Institutional Properties, Capital Markets, CBRE.

“Investors anticipate that the occupier trends with the greatest impact on real estate investments are last-mile logistics, flexible space, and less reliance on traditional office and retail. Investors are assessing the risk of high proportions of coworking space within a property on its long-term liquidity and residual value. Sustainability continues to factor into decision-making but is not a top priority for investors,” added Mr. McAuliffe.

U.S. gateway cities continue to command considerable interest. Seattle’s ranking has risen several places since 2016, moving from seventh place to make the top three. As investors maintain their pursuit of good secondary assets, large upward shifts brought Nashville, Portland, and Tampa/St. Petersburg into the top 10.

“As recently as 2016, Seattle was not considered a ‘gateway’ market,” said John Miller, Senior Managing Director for CBRE in the Puget Sound region. “Considering the unprecedented growth that we’ve experienced in just the last two years alone, it’s no surprise to hear that investor interest continues to propel us forward, even as they look to recreate this transformation in other secondary markets.”

Among the five different asset strategies—core, good secondary, value-add, opportunistic and distressed—value-add remains the preferred strategy (34 percent), but is down from 2017’s level (41 percent). Investor appetite for good secondary assets increased for the fourth consecutive year, as the supply of core assets diminishes and investors broaden their search for yield. Institutional investors—comprising sovereign wealth funds, insurance companies, and pension funds—are more interested in core assets than are other types of investors, with 33 percent indicating core as their preferred strategy vs. 20 percent of overall investors.

“Given the declining return environment, it is no surprise that investors are racing to find the next Seattle by increasing their focus on the higher-yield potential of high-growth secondary markets. Investors are also moving further out on the risk spectrum to look for more opportunistic equity deals. Markets like Tampa Bay, Nashville, Montreal and Portland all rose substantially in investor interest this year, not only because of superior current yields than the majors, but for the single most important factor of all: higher projected office-using job growth. Investing in markets with the fastest job growth can lead to greater NOI growth and additional cap rate compression even in a rising interest rate environment,” said Spencer Levy, Head of Research, Americas, CBRE.

Industrial is increasingly the preferred property type, cited by 50 percent of investors as the most attractive for investment in 2018, up from 38 percent in 2017. Multifamily (20 percent) and office (14 percent) are the next attractive property types, though their shares decreased from last year. Despite competition from e-commerce, the retail sector improved modestly from last year, attracting 10 percent of investors compared to 8 percent in 2017.

Investor interest in “alternatives” strengthened across most sectors. Real estate debt (37 percent) is the number one alternative currently held by most investors and will be targeted most actively this year. Student housing, senior housing, and healthcare are the next most common alternatives, each held by roughly 20 percent of investors.

The breakdown of anticipated capital deployment amounts is roughly comparable to 2017, although expectations for larger purchases in the $2 to 5 billion range are noticeably higher (14 percent in 2018 vs. 9 percent in 2017). Institutional investors have different expectations than the average investor, with half intending to deploy more than $1 billion of capital this year, and one-third intending to deploy more than $2 billion (compared to 28 percent and 18 percent, respectively, for other investor types).

Survey respondents and methodology

The Americas Investor Intentions Survey 2018 is part of a larger global survey, which was conducted among CBRE clients between mid-November 2017 and mid-January 2018. Approximately 300 survey respondents indicated the Americas is the global region that they are responsible for in their current position. This survey covers the responses of those investors. The Americas respondents represent a wide cross-section of real estate companies and investor types. Slightly more than one-third are fund or asset managers. Institutional investors—SWFs, insurance companies and pension funds—account for 14% of respondents. Among surveyed fund/asset managers, the largest source of capital is pension funds (66%). SWFs were also identified as a significant source of capital (43%). Most respondents (59%) have less than $10 billion in assets under management (AUM). Twenty-five percent have more than $50 billion in AUM, and the remaining 16% fall somewhere in between.